3 businesses, 1 deep discount: DCM Shriram’s demerger is a Buffett-style bet

Source : http://www.tradingview.com

Why demergers unlock value

A demerger involves separating one or more business units into independent entities. This restructuring often aims to sharpen focus,improve capital allocation, or unlock value for shareholders.

From an investor’s perspective, it offers an opportunity:

One business might be undervalued because it’s lumped with a weaker segment

A capital-intensive division might be weighing down a profitable one

Spinning off the parts could help the market re-rate both

Simply put, demergers let investors assign the ‘right value’ to each business independently.

Recent demergers that created wealth

In the past two years alone, several Indian companies have executed successful demergers. These include Edelweiss Financial (Nuvama), Shipping Corporation, and TVS Holdings (Sundaram Clayton), among others.

As investors started valuing these businesses independently, market caps surged, in some cases up to 5x. These stories show a pattern: if the fundamentals are right and the structure changes, re-rating follows.

Could DCM Shriram Industries be next?

The origins of DCM Shriram Industries trace back to 1889, when Delhi Cloth Mills (DCM) was established. By the 1960s, DCM had grown into the third-largest business group in India, spanning textiles, chemicals, and engineering.

Over time, internal conflicts and succession complexities led to multiple splits.

Source: DCM Shriram Industries – Q4FY25 Investor Presentation

Three businesses, one company

DCM Shriram Industries Ltd (DSIL) operates across three core segments:

1. Sugar and its allied products (including alcohol and power)

2. Industrial fibres (rayon tyre yarn, cord and fabric/chafer for tyres)

3. Fine chemicals (used in pharma, agrochemicals, fragrance, dyes, etc.) with a growing presence in defence-related manufacturing. Its key manufacturing facilities are in Daurala (Uttar Pradesh) and Kota (Rajasthan).

Over the years, the company has been gradually increasing its focus on the chemicals and rayon segments, with installed capacities of 21,463 tons per annum and 17,055 tons per annum, respectively, to diversify away from the inherently cyclical sugar business. The sugar division is fully integrated, with forward linkages into distillery and cogeneration power, which helps cushion the impact of volatile sugar prices.

Revenue mix and profitability by segment

In FY25, the sugar segment (including power and alcohol) contributed 51.11% to the company’s total revenue, followed by industrial fibres at 27.96%, and chemicals at 20.92%. Segment-wise profitability also reflects this diversity: PBIT margins stood at 7% for sugar, 19% for industrial fibres, and 9% for chemicals, leading to a blended PBIT margin of ~11%.

Each segment carries distinct characteristics. The sugar business is low-growth, heavily regulated and prone to earnings volatility. However, its integrated structure, with distillery and power operations, has helped stabilise earnings in recent years.

The industrial fibres segment, despite being low-growth, has turned into a cash-generating engine for the company. With strong margins and consistent returns, it was also the most profitable business vertical in FY25. The chemicals division, while smaller in scale, has maintained healthy profitability and shows signs of improving ROCE.

What the demerger involves

On November 14, 2023, the Board of Directors of DCM Shriram Industries approved a Composite Scheme of Arrangement involving both a merger and demerger across multiple entities. As part of this scheme, Lily Commercial Private Limited would be amalgamated with DCM Shriram Industries, and DSIL would demerge its chemical and rayon (including defence and engineering) businesses into two wholly owned subsidiaries: DCM Shriram Fine Chemicals Ltd amd DCM Shriram International Ltd.

The appointed date for the restructuring was set as April 1, 2023, subject to necessary statutory and regulatory approvals.

Post-restructuring, the chemical and rayon undertakings, including emerging defence and engineering projects, will be transferred on a going-concern basis to their respective new entities. The residual DSIL will retain only the sugar, alcohol, and power businesses.

This implies that DSIL, post-demerger, will operate at a smaller scale with a more focused but less diversified portfolio, losing the margin stability and return resilience historically supported by the chemical and rayon divisions.

While the business model and demerger structure offer compelling strategic rationale, investors ultimately look for confirmation or opportunity in the stock price.

Valuation: Is the market pricing it right?

Currently trading at a P/E of 14.8x, EV/EBITDA of 8.5x, and MCap/Sales of 0.7x, DCM Shriram Industries’ current valuation is marginally above its five-year averages of 10.9x, 7.4x, and 0.3x, respectively.

On the surface, these numbers suggest the company may be trading at a premium to its historical range. However, with the demerger on the horizon, the real potential lies in “value unlocking”, particularly if each business begins commanding valuations reflective of its fundamentals.

Sum-of-the-Parts (SOTP): The right lens for a demerger story

Given the nature of the restructuring, the Sum of the Parts (SOTP) valuation method is the most appropriate approach to assess DCM Shriram Industries.

After the demerger, the three business verticals – Sugar & Distillery, Industrial Fibres (Rayon), and Chemicals – will operate under separate listed entities. By applying relevant EV/EBITDA multiples to each vertical and summing them up, we can estimate the fair value of the combined post-demerger entities.

Segment-wise justification of valuation multiples

Sugar & Distillery: Sugar stocks in India typically trade at ~11x median EBITDA due to low growth, high regulation, and cyclical volatility. Accordingly, we assign an 8x multiple to this segment.

Industrial Fibres (Rayon): This is a cash-generating segment with the highest PBIT margins and improving return ratios. A close comparable is SRF Ltd., which uses its saturated rayon and industrial fibre business as a stable base while investing in high-growth segments. Similarly, DCM Shriram International could gain market share in this segment and use its fibre strength to scale other verticals over time. While SRF trades at a median of 22x, for DCM Shriram Industries, a 10-12x EBITDA multiple appears justified given comparable peer valuations.

Chemicals: Indian chemical companies typically trade between 10-20x EBITDA, across the spectrum. Given DSIL’s capacity addition and financial improvement, a 15x may be justified.

Defence: The company has taken early steps in defence manufacturing under the Government’s ‘Make in India’ push. Collaborations include:

• Armoured vehicles with Ford and GAIA Automotive (Israel) for design, certified by ARAI, Pune.
• Drones (UAVs) in partnership with Zyrone Dynamics (Turkey) for military and commercial variants.
• Anti-drone systems via an exclusive agreement with Skylock, including rights to export globally.

While the business holds potential, the company has not reported any meaningful revenues yet. That’s why we have assumed zero contribution from it in the SOTP calculation.

SOTP Valuation

Based on segment-wise FY25 sales and justified multiples, here’s what the SOTP looks like:

Note: This is not a prediction of where the stock price could head. It’s just an if-then calculation for academic purposes.

Against the current market capitalisation of around Rs 1483 crore, this implies that DCM Shriram Industries is trading at a discount of 36% even in comparison to the lower end of the valuation band.

Once the demerger is completed and the new entities are listed separately, each will have the opportunity to command a valuation more aligned with their business economics and peer comparable. The market may begin to appreciate the underlying value of each division, making this a classic value-unlocking special situation.

A quiet opportunity hiding in plain sight

Warren Buffett’s concept of work-outs was never about predicting the market, but about recognising when structural changes could lead to value discovery.

DCM Shriram Industries fits that mould. The numbers suggest an undervaluation, while the restructuring promises clarity, focus, and re-rating potential.

For investors willing to wait for the market to acknowledge what the business fundamentals already reflect, this might be one of those quiet opportunities hiding in plain sight.

Note: We have relied on data from http://www.Screener.in and http://www.tijorifinance.com throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.

Rahul Rao has helped conduct financial literacy programmes for over 1,50,000 investors. He also worked at an AIF, focusing on small and mid-cap opportunities.

Disclosure: The writer or his dependents do not hold shares in the securities/stocks/bonds discussed in the article.

The website managers, its employee(s), and contributors/writers/authors of articles have or may have an outstanding buy or sell position or holding in the securities, options on securities or other related investments of issuers and/or companies discussed therein. The content of the articles and the interpretation of data are solely the personal views of the contributors/ writers/authors. Investors must make their own investment decisions based on their specific objectives, resources and only after consulting such independent advisors as may be necessary.

An earlier version of this article stated, “Currently trading at a P/E of 36x, EV/EBITDA of 15.9x, and MCap/Sales of 1.8x – only marginally above its five-year averages”. It should read currently trading at a “P/E of 14.8x, EV/EBITDA of 8.5x, and MCap/Sales of 0.7x, DCM Shriram Industries’ current valuation is marginally above its five-year averages”.

The article incorrectly stated, “By applying relevant Mcap/Sales multiple to each vertical and summing them up..” instead of “By applying relevant EV/EBITDA to each vertical and summing them up”.

We regret the oversight and apologise for any confusion caused.